ACCENTURE BANKING

TOP 10
TRENDS
TO WATCH
IN 2018
 “ MAYBE GOOD.
MAYBE BAD.”
Such is the calm refrain in a Chinese parable of a wise elder
upon hearing various prognosticative cries from the town’s
villagers. It is also a chorus that can be applied to the banking
industry for 2018, as the world of banking continues to (r)evolve.

Based on my interactions with bank leaders over the last 12

months and without the benefit of a crystal ball, here are 10
key trends, predictions and best guesses that we think our
retail and commercial banking clients should pay attention to
in 2018. These 10 are among many topics being driven by a
mix of regulatory, competitive and technology issues. Some
are continuations of trends from the last few years, while others
represent some new dynamics in the industry. Many are also
congruent, interconnecting in ways that could cross-amplify
their impact on the industry.

The fact that there are exactly ten predictions owes more to
comedian David Letterman and the Billboard charts than it
does to any fortuitous alignment between the decimal system
and the current state of the global retail and commercial banking
industry. I will undoubtedly miss the mark some on what will
matter most in 2018, and expect you will find plenty within the
list to debate. At least, it will be a catalyst for good conversation
about the future of banking.

ALAN MCINTYRE, SENIOR MANAGING DIRECTOR,

ACCENTURE GLOBAL BANKING

2 TOP 10 TRENDS TO WATCH IN 2018

 It took Commodore Perry’s American fleet sailing into Tokyo Bay
in 1853 to open up trade in Japan after 200 years of economic
and cultural isolation. While the Japanese economy had stagnated,

TREND 1
the promiscuous traders of the Dutch East India Company were
busy creating the most valuable business ever by establishing
and exploiting new commercial partnerships. In banking, PSD2
COMMODORE is forcing European banks to make certain banking services
PERRY ARRIVES, available for third parties to incorporate into their offerings. In
other markets, like the U.S., competitive pressures are driving
USHERING OPEN
fragmentation of the traditional vertically integrated bank value
BANKING INTO chain. A decade ago, there were a handful of open APIs exposed
THE MAINSTREAM. by banks to enable third parties to work with them. That number
has now exploded to thousands and is growing every week. We
are also seeing specialist banks being created for the sole purpose
of enabling partners, like retailers and telecoms players, offering
banking services. 2018 will be the year in which attitudes toward
Open Banking start to separate those who want to differentiate
themselves through being good trading partners from those
still hunkering down behind trade barriers, seeking to harvest
diminishing profits from old business models.

Twenty-five years ago, banks were debating whether it was safe

to execute electronic transactions over the nascent internet, or if
they should instead build their own proprietary networks. Twenty-
five years from now, the current debate about the safety of using
the public cloud for banking will seem similarly quaint. There is
already plenty of evidence that the cloud can be as secure as

TREND 2 any private data center and the benefits of scalability, increased
agility and variable costs are beginning to make the business
cases for migration compelling. This year, some banks will
PUBLIC CLOUD continue to swim against the tide and resist the inevitable, but
MIGRATION IS current predictions are that by 2020 more computing power will
EVER MORE be deployed in the public cloud than in the totality of private data
INEVITABLE. centers. So, 2018 will be the year in which the cloud conversation
in retail and commercial banking becomes predominantly about
the “how and when,” rather than the “if” or “why”.

3 TOP 10 TRENDS TO WATCH IN 2018

 Traditional mainframe core banking applications are not well suited
to the digital economy. The world of overnight batch processing
and four o’clock p.m. transaction cut-offs sits uncomfortably
with customers’ expectation of real-time banking. One solution
is to rip out decades-old technology and replace it with modern,

TREND 3
real-time architectures capable of powering a digital customer
experience. In other words, a “heart” transplant. For those banks
with a five-year time horizon and deep pockets, that could be an
THE PROMISE attractive option—albeit an expensive and risky one, especially in
OF DIGITAL light of the promise of blockchain as a medium-term replacement
DECOUPLING for traditional books and records. However, for many banks, the
alternative of “freeze and wrap” is becoming increasingly attractive.
MEANS FEWER
It is where existing core products systems are retained as books
HEART TRANS- of record while customer engagement and analytics systems are
PLANTS AND decoupled and powered by a cloud-based data layer that sits
MORE BYPASSES. atop legacy systems—what is more akin to a heart bypass. Purists
might say it’s a temporary fix for a chronic disease, but with the
emergence of new cloud-based core banking-as-a-service providers
along with the power of blockchain, 2018 will be a year in which
we are likely to see fewer heart transplants and a lot more bypasses.

The hype of digital delivery is huge, but the reality is often

disappointing. Customers have been conditioned by other
digital experiences to expect to be able to sign up for new services
with a few clicks on their phone. In some emerging markets, that
is how banking is already done. It can be easier to open a bank
account in New Delhi than it is in New York, thanks to the advent

TREND 4
of the Aadhar digital identification system in India. The reality is
that a minority of retail and commercial banking products can be
opened through an end-to-end online experience, and an even
END-TO-END smaller number available through mobile. Leaders are now
DIGITAL incorporating advanced Know Your Customer (KYC) and multi-
ORIGINATION factor authentication approaches into their digital apps, while
BECOMES laggards still ask you to come into a branch to sign a piece of
paper. The evidence in the U.S. is that smaller banks are now losing
TABLE STAKES.
material share in the millennial and mass affluent segments to
big national players because small banks are struggling to deliver
a good digital customer experience. In 2018, a failure to provide
end-to-end digital origination will start to move from the state of
disappointment to more of an existential threat.

4 TOP 10 TRENDS TO WATCH IN 2018

 Banks’ movement towards better robust digital product origination
opens them up to a new type of threat: synthetic identity fraud.
In this brave new world, the bad guys are creating new identities
using a combination of real and fabricated information, or
sometimes entirely fictitious information. Once limited to the
credit card market, online deposit and loan origination now
allows fraudsters to open digital accounts that pass all the usual

TREND 5
security checks. It’s a phantom crime that is costing banks billions
of dollars and countless hours as they chase down people who
don’t even exist. Often, a bank doesn’t recognize there’s an issue
INCREASING until it starts to see suspicious activity in these accounts and
SOPHISTICATION then, in a puff of digital smoke, the account is closed and the
OF DIGITAL FRAUD bad guys have moved on. As the fake-news scandals of the last
COMMANDS HIGHER two years have shown, the power of automation is that deception
PROFICIENCY AT and misdirection can now be done at scale in the digital world. In
2018, banks will need to get better at sorting the real customers
SORTING REAL
from the fake, without undermining the benefits of a compelling
BANK CUSTOMERS and differentiating digital customer experience.
FROM FAKE ONES.

In 1995, there were 34,000 physical travel agent locations in the

U.S.1 Due to the impact of the internet and now mobile, this network
shrunk to 14,000 in 2017. The value-add of the physical agent
sites now tends to be defined by a negative: “What can’t I do on
Expedia?” Banks in many developed countries are a decade or

TREND 6
more behind the travel agent trend, but are moving in the same
direction as the number of bank branches and counter transactions
decline globally. In some regions like Scandinavia and the U.K.,
THE SWEET SPOT it is happening faster. Why bank in real life when you can do it
OF A DIGITAL- online? Unlike Blockbuster video stores, bank branches won’t
FIRST BANK disappear totally. They still play a valuable role in complex advisory
MEANS A LOT sales, being a physical expression of the brand and a place for
customers to complain in person. The sweet spot of a digital-
FEWER BRANCHES.
first business supported by selected physical locations is now
becoming clear for many banks (and, conversely, the advantage
of physical locations is becoming increasingly important for many
digital businesses). So, the challenge for banks is to orchestrate
the right mix of branches and digital offerings as quickly as
possible. It means that the sound of the shutters coming down
permanently may become deafening in 2018.

5 TOP 10 TRENDS TO WATCH IN 2018

 Despite the tens of billions of dollars of venture capital money
piling into the fintech sector over the last five years, the meteor
strike that was going to wipe out the banking dinosaurs hasn’t
happened. What has happened is that fintech lit an innovation
flame under incumbent banks and accelerated their evolution.
2018 will likely see more fintech acquisitions as large players

TREND 7
buy rather than build—just as BBVA did with Simple, BNP with
Compte-Nickel and JPMC with WePay. We will also see more
imitation-as-the-sincerest-form-of-flattery, such as Finn by JPMC.
MORE More broadly, bank innovation will have more of a business-as-
CONSOLIDATION, usual feel, as regtechs, paytechs and every other type of banking
MARKETPLACES start-up find ways to play well with established providers. Some
of that normalization will come from incumbents being more
AND
comfortable dealing with small vendors, while some will come
NORMALIZATION from better intermediation, for example, core banking vendors
AS BANKS AND like Temenos creating app stores that create business-to-business-
FINTECHS to-business models for fintechs. While industry dinosaurs will
GET COZIER. remain dominant in 2018, 2019 and beyond, big tech beasts
may appear that indeed present more of an extinction threat
to traditional banks. Super predators—some coming from the
East (such as Ant Financial and Tencent) and some coming from
the West (such as Amazon and Apple)—will likely spend 2018
sharpening their claws.

Ten years since the start of the 2008 global financial crisis, the
tsunami of regulations for European banks shows little sign of
abating in 2018. Compliance with the EU’s Markets in Financial
Instruments Directive, General Data Protection Regulation,
second Payment Services Directive and International Financial
Reporting Standards 9 alone will require billions of Euros of

TREND 8 investment, all at a time when the pre-tax profitability of the

European banking industry is still half of what it was in 2006.
REAL In contrast, the regulatory tide in the U.S. is receding, with
systemically important financial institution lines being redrawn,
REGULATORY
liquidity restrictions being eased and consumer-oriented regulation
RELIEF IN AMERICA being rolled back in favor of “a more balanced approach”. Even
ENTICES BANKS before these changes take effect, U.S. bank profitability is already
TO FLEX THEIR back above 2006 levels, and even with increased capital levels,
INVESTMENT AND industry returns are now back above the cost of capital. With
COMPETITIVE regulatory relief, reductions in corporate tax rates and rising
MUSCLES. interest rates, U.S. banking could very soon be back to pre-crisis
returns on equity. The result in 2018 could be that large U.S.
banks start to flex their investment and competitive muscles
again in a way that we haven’t seen in a decade.

6 TOP 10 TRENDS TO WATCH IN 2018

 Christmas time in the U.S. comes with many reruns of the movie
It’s a Wonderful Life. In it, actor Jimmy Stewart as do-gooder
George Bailey stands on the counter of his Bedford Falls savings
and loan bank to stop a run on the bank. He’s successful because
he has known many of the customers his whole life and they
trust him. For most bank customers in the real world, that idyllic

TREND 9 scenario is far from real life. While customers trust banks to hold
their money and personal data, they are skeptical about banks
always providing advice and services that benefit them. One of
BANKS GET the promises of artificial intelligence (AI) in banking is to reverse
SMARTER WITH this erosion in customer trust and start providing contextual,
ARTIFICIAL holistic advice that is truly in customers’ best interest. Simple
INTELLIGENCE to say, but tough to do. It will mean material cannibalization of
TO KNOW THEIR existing revenue streams, the end of product silos and a level of
CUSTOMERS IN A radical transparency unfamiliar to most banks. Yet, if banks fail
to use digital technology to replicate the banking intimacy in the
“BEDFORD FALLS”
fictional town of Bedford Falls, then someone else will do it for
KIND OF WAY. them and, in the process, bypass banks altogether. In 2018, we
are therefore likely to see the first concerted attempts by banks
to secure their own long-term future by using AI to always do
the right thing for their customers, regardless of the short-term
impact on profit.

2017 will be remembered as 12 months in which the value of

Bitcoin, the leading cryptocurrency, went from under $1,000
to nearly $20,0002—a healthy return for the world’s some 3.5
million active bitcoin account holders. It is similar to the Dutch’s
tulip. Between 1634 and 1637, the price of a tulip bulb in Holland
skyrocketed 60-fold.3 A single bulb equaled 10 times the annual

TREND 10
wages of a skilled worker and with it, a person could buy a lavish
home in Amsterdam. By that measure, a similar speculative fever
could see the Bitcoin price rise by another order of magnitude
CRYPTOCURRENCY in 2018. However, Bitcoin, like Dutch tulip bulbs, is currently
VALUE COULD functioning as a purely speculative asset and, hence, is unlikely
MIMIC DUTCH to defy economic gravity over the medium term. When the
TULIP MANIA. bubble bursts, it won’t wreck any economy–just as the Dutch
economy shrugged off tulips becoming just plants again.
Latecomers will lose money, but as always, lessons will be
(re)learned. What will continue to matter is the evolution of
the underlying distributed ledger technology. At some point
(not in 2018), this technology may be used as the basis for
cryptocurrencies that can simultaneously function as a store
of value, a medium of exchange and a unit of account. Until then,
retail and commercial bankers shouldn’t worry too much about
making Bitcoin-denominated mortgages.

7 TOP 10 TRENDS TO WATCH IN 2018

END NOTES ABOUT ACCENTURE
1
CNN, “The travel agent is dying, but it’s not yet dead,” Accenture is a leading global professional services
October 10, 2013. company, providing a broad range of services and
http://www.cnn.com/2013/10/03/travel/travel-agent-survival/
solutions in strategy, consulting, digital, technology
2
Fortune, “Bitcoin Hits a New Record High, But Stops and operations. Combining unmatched experience
Short of $20,000,” December 17, 2017. and specialized skills across more than 40 industries
http://fortune.com/2017/12/17/bitcoin-record-high-short- and all business functions—underpinned by the
of-20000/
world’s largest delivery network—Accenture works
3
The Bubble Bubble, “The Dutch ‘Tulip Mania’ Bubble,” June at the intersection of business and technology to
15, 2012. help clients improve their performance and create
http://www.thebubblebubble.com/tulip-mania/
sustainable value for their stakeholders. With more
than 435,000 people serving clients in more than
120 countries, Accenture drives innovation to
improve the way the world works and lives. Visit
CONTACT US us at www.accenture.com.
ALAN MCINTYRE
Senior Managing Director, Accenture Global Banking
a.mcintyre@accenture.com
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